Monday, July 25, 2005

OFFSHORING, or the outsourcing of services by developed country firms to captive units or independent suppliers in developing countries has for some time now been a source for controversy in the developed countries, especially the US. Arguments that such offshoring involves not just the transfer abroad of new job opportunities that would have arisen in the developed countries, but the loss of existing jobs in the US to offshore locations abound. They derive their strength from reports that specific corporations have been reducing or plan to reduce their workforce in developed-country locations, even while expanding them in developing countries such as India. In the event, calls for protectionist responses that limit and roll-back the offshoring of services have increased dominate the US debate. On the other hand, firms clamouring to retain their tax holidays despite booming profits present outsourcing as the route to India’s economic salvation.

The recently released Annual Trade Report of the WTO provides an occasion to revisit these arguments, because a special chapter in the report focuses on offshoring of IT services and argues that: (i) the extent of net offshoring is exaggerated; and (ii) that to the extent that offshoring occurs its negative effects on the source country and positive benefits for the host country have also both been exaggerated.

BENEFITS EXAGGERATEDThe WTO’s argument begins with pointing to the extremely shaky and predominantly private sector generated database on the phenomenon. In some cases as in India, even official information as available in the balance of payments statistics is collected and collated by a private body --- in this case the National Association of Software and Services Companies (NASSCOM).

While recognising the private nature of the sources of these statistics, the WTO, for lack of an alternative, places IT and software expenditure worldwide in the order of 650 to 710 billion dollar in 2003. Total outsourced IT services (excluding software) are paced at around 285 billion dollar. Offshored IT and BP services are estimated to have been in the order of 40 to 45 billion dollar in 2003. This places offshored IT and BP services at just 2.5 per cent of world commercial services exports, valued at 1,800 billion dollar and at a meagre 0.125 per cent of world GDP valued at 36,000 billion dollar. No one can claim that this is enough to disrupt economic activity and employment in the developed countries.

The point is that even of this, the share offshored to captive units is quite substantial according to available estimates. According to the WTO: “Many surveys confirm that at present, most offshoring takes the form of captive offshoring. This view is supported by data on US IT services imports. In 2003, affiliated trade (or form US subsidiaries or joint ventures abroad) accounted for 63 per cent of US computer and information services imports, and for 77 per cent of US imports of other business, professional and technical services, a proxy for business process services.”